Toys 'R' Us Gets a Chance to Restructure Afforded to Few Retailers

This holiday season, the shelves will be stocked at Toys "R" Us thanks to an unprecedented bankruptcy loan that could help the company reset.

Toys "R" Us filed for Chapter 11 bankruptcy with a $3.13 billion financing package -- the largest ever for a retailer, according to The Deal's (TheStreet's sister publication) data -- that will provide the company with $2.3 billion in fresh capital. The funding is meant to give the retailer what it needs to get its shelves stocked for the holiday season and operate as normal.

It's also one of the longest leashes given recently to a retailer in bankruptcy, "a feat that has not been accomplished in any other recent major retail case," Toys said in court documents. The financing seems to give Toys a chance to that retailers in bankruptcy are seldom afforded.

Marshall Huebner, head of restructuring at Davis Polk & Wardwell LLP, represents the agent on the loan, JPMorgan Chase NA. He explained that because of Toys' accelerated timeline for entering bankruptcy -- moved up as vendors began demanding cash for inventory after news of a possible bankruptcy filing was reported in the media -- the package was put together in a week.

The loan he said, is a "huge vote of confidence in Toys by JPMorgan and the market," he said, adding that lenders felt comfortable because Toys was able to provide a collateral package and cash flows that made lenders comfortable, even without the traditional milestones that govern so many loans.

The lender group isn't requiring that the company sell its assets at auction after so many days or propose a plan to repay them and exit bankruptcy in on a very short timeline. Talk so far of Toys' plan in bankruptcy has focused on operational restructuring -- that is, fixing what's keeping the business from earning more, rather than just devising a plan to offload debt and hand the company off. Huebner added that the ability to work on the business from an operational standpoint is another unusual feature in the loan -- most of the time "the DIP is designed to fund the case and the operational rebirth is effectuated largely after the bankruptcy," he said.

Toys 'R' Us survives, for now.

"It's an honest-to-goodness restructuring," Edward T. Gavin, managing director at Gavin/Solmonese LLC said of the case, calling the focus on fixing the business from an operational standpoint "a breath of fresh air."

The financing has allowed Toys to stock its shelves for the holiday season, but the company still has to sell the merchandise. Like most retailers, Christmas is a critical time for Toys "R" Us.

Experts say that this shopping season likely will steer the company's restructuring.

Toys is expected to bring in just under $5 billion in sales during the fourth quarter, bringing its yearly total to $11.7 billion, according to FactSet. That's almost 43% of its revenue for the year.

The company, which is privately held by three investment firms following a $6.6 billion leveraged buyout in 2005, doesn't have to give full results publicly. However, it has filed a budget with the bankruptcy court, that's required by its bankruptcy loan.

In the fall months, before shopping starts in full, operating cash flow (or the amount of cash Toys generates from its revenue) is expected to jump from negative $93 million in October to $200 million in the black in December. The loan does require that Toys complies with this budget.

"It'll be a wait and see how they do with the holiday season," said Robert Brady of Young Conaway Stargatt & Taylor, LLP, who's worked on the restructurings of Polaroid, Tribune Co., and the Los Angeles Dodgers, to name a few. "That will drive where the restructuring goes."